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All Americans with over $12,200 USD (in 2019) in global income (including the equivalent in pounds or other currencies), or just $400 of self-employment income, are required to file US taxes. Expats get an automatic filing extension until June 15th, which they can further extend to October 15th if they need to. This is often necessary for Americans living in the UK who have to file a UK tax return first, as the UK tax year runs from April to April (rather than January to December), meaning that they can only start filing their UK tax return after April.
Unfortunately, the US-UK tax treaty doesn’t automatically exempt Americans living in the UK from having to file or pay US taxes. The majority of Americans who live and work in the UK and who pay UK taxes can completely eradicate their US tax bill though by claiming the US Foreign Tax Credit on IRS Form 1116 when they file their federal tax return. The Foreign Tax Credit allows expats to claim US tax credits to the same value as foreign taxes that they’ve paid, and as British income tax rates are higher than American, this normally means paying no US taxes and carrying forward excess foreign tax credits to future years returns. Alternatively, some expats may be better off claiming the Foreign Earned Income Exclusion on Form 2555, which lets them exclude the first $105,900 USD (in 2019) of their earned income from US taxation.
Most expats have heard of FATCA and FBAR, but they may not be sure exactly what they mean and how they are affected by the filing requirements. FATCA is the 2010 Foreign Account Tax Compliance Act, a law that requires expats with certain foreign registered financial assets to report them each year by filing Form 8938 with their federal tax return. The Form 8938 threshold varies by filing status, but starts at $200,000 USD. FATCA also requires foreign banks and investment firms to report their American account holders’ balance and contact details directly to the US government or face fines when they trade in US markets. This affects expats too, as the IRS can now investigate their financial activity around the world. FBAR (Foreign Bank Account Report) is a separate filing requirement for Americans who have a total of over $10,000 in offshore bank, business, trust, and investment accounts at any time during the year. Neither FATCA nor FBAR imply any new taxation, they just allow the IRS to check that Americans (including expats) with foreign financial accounts are disclosing them annually, and reporting their worldwide income accurately on the US tax return. Penalties for neglecting (or inaccurate) FBAR filing are sky high, so it’s definitely one not to forget.
Americans in the UK who work for an American firm or who are self-employed have to pay US social security and Medicare tax. However, if they also pay UK social security taxes, then a treaty called a Totalization Agreement exists to prevent double social security taxation. The Totalization Agreement position has to be claimed when expats file their US tax return though. Which country expats are liable to pay social security taxes to depends on how long they’ll be living in the UK for.
The 2017 US Tax Reform changed the landscape for American owners of foreign registered businesses. While all US-owned businesses must be reported on a US tax return, previously, it was possible to defer US taxes on profits left in a foreign registered business. The Tax Reform however introduced a new tax on foreign business earnings called GILTI (Global Intangible Low Tax Income). Expats with a foreign business should consult with a US expat tax specialist to check whether their business structure is as tax efficient as possible following the changes in the tax reform. Tax associated with the new GILTI provision is not currently eligible to be reduced using foreign tax credits. This has led many US taxpayers to revisit their foreign businesses to create a more tax efficient structure.
Americans living in the UK often qualify as British tax payers due to residence. If so, and their only income is from employment from a UK firm, their UK income tax will be deducted at source and they won’t have to file a UK tax return. If they have other sources of income on the other hand they will have to file a UK tax return, based on a tax year of April 6th – April 5th. The UK filing deadline is the following January 31st.
Due to FATCA as well as a UK-US tax information sharing agreement, not filing a US tax return and FBAR is a risky game to play. Many Americans living in the UK haven’t been filing US taxes though, as they weren’t aware that they have to. There’s an amnesty program for these folks called the Streamlined Procedure, which allows them to catch up without facing penalties, so long as they do so voluntarily before the IRS contacts them about the fact they haven’t been filing. All expats can benefit from the advice of a US expat tax specialist, who can assist in saving significant US tax and penalties, as well as a load of time and hassle.
Katelynn Minott is a senior CPA and partner at Bright!Tax (brighttax.com). Bright!Tax is a leading provider of expat tax services for Americans living abroad. Every year Bright!Tax helps thousands of Americans living in the UK to file their US taxes, quickly, accurately, in their best interests, and with the minimum of hassle. If you have any questions about filing taxes as an expat in the UK, don’t hesitate to get in touch, and we’ll be happy to help.